If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Iofina (LON:IOF) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Iofina:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = US$2.9m ÷ (US$40m - US$8.1m) (Based on the trailing twelve months to December 2020).
Thus, Iofina has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Chemicals industry average of 10%.
In the above chart we have measured Iofina's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Iofina.
What Can We Tell From Iofina's ROCE Trend?
We're delighted to see that Iofina is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 9.2% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 21%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
From what we've seen above, Iofina has managed to increase it's returns on capital all the while reducing it's capital base.
Iofina does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...
While Iofina may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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